Above: File image of Wang Yi. Source: G20 Argentina. Accessed: Flickr. Rights: CC 2.0.
There is a strong link between the China-U.S. axis of Donald Trump's global trade war and the Australian Dollar.
Australian Dollar is plumbing new lows against some G10 peers after China's foreign minister said his country will continue to retaliate for the "arbitrary tariffs" imposed by the U.S.
Analysts say the pointed comments by Beijing's most senior foreign affairs official point to a ratcheting up of a trade war that has implications for Australia due to its significant trade linkages with China.
Wang Yi accused Washington of "meeting good with evil" in a press conference today at China's annual National People's Congress (NPC).
"Antipodean currencies bucked the trend of USD weakness, and instead followed global equity sentiment lower as markets weighed the uncertainty from President Trump’s back-and-forth on tariffs," says Max Lin, a strategist at CIBC Capital Markets.
The Pound-to-Australian Dollar exchange rate (GBP/AUD) is down one per cent on the day at 2.0507, putting it on course for the highest daily close since 2016.
The Euro-to-Australian Dollar exchange rate has surged to 1.7243, putting it on course for the highest close since 2020.
However, against the U.S. Dollar, we see AUD/USD holding a weekly gain at 0.6299, confirming that Australian Dollar weakness has a linkage with the U.S. Dollar selloff.
This is unusual, as typically the AUD outperforms the likes of EUR and GBP when USD is falling. But this week, a lot changed in the FX markets, with the U.S. Dollar tracking U.S. equities and falling in response to sanctions.
The Australian Dollar maintains a long-standing positive correlation with U.S. stocks, which means the falls in the S&P 500 continue to offer a good guide as to why AUD/GBP is lower (inverse of GBP/AUD):
Above: AUD/GBP and U.S. S&P 500 stock index.
The Dollar's selloff follows fears that the tariff war will slow U.S. growth, lead U.S. equities to underperform and prompt the U.S. Federal Reserve to cut interest rates further and faster.
This all loops back to the headlines about China saying it is ready to up the ante, confirming this axis of the trade war is driving the Aussie Dollar's weakness.
Wang told reporters that China's efforts to help the U.S. contain the illegal trade in fentanyl have been met with punitive tariffs, which are straining their ties.
"No country should fantasise that it can suppress China and maintain a good relationship with China at the same time," he said. "Such two-faced acts are not good for the stability of bilateral relations or for building mutual trust."
A strong recovery in U.S. stock markets would be the obvious key to an Australian Dollar recovery, but this requires Trump to pull back and admit he got it wrong.
However, for now at least, he continues to point to April 02 as the date his biggest package of sanctions will land.